Euro Area Inflation: Societe Generale Warns Indirect Effects Still Loom

Economists at Societe Generale have issued a fresh analysis suggesting that the euro area has not yet fully absorbed the indirect effects of previous price shocks, even as headline inflation rates moderate. The French bank’s research indicates that a delayed pass-through from producer prices to consumer prices could keep underlying inflationary pressures alive for longer than markets currently anticipate.

Delayed Pass-Through from Producers to Consumers

The core of Societe Generale’s argument rests on the observation that many businesses, particularly in services and non-energy industrial goods, have been slow to pass on higher input costs to end consumers. While energy prices and supply chain disruptions have eased from their 2022 peaks, the cumulative impact of earlier cost increases is still working its way through the pricing pipeline. This lag, the bank notes, could mean that disinflation in the euro area may proceed more gradually than the rapid decline seen in headline figures.

Implications for the European Central Bank

For the European Central Bank (ECB), this analysis introduces a layer of complexity into the rate-setting calculus. If indirect inflation effects are indeed still pending, the ECB may need to maintain a restrictive monetary policy stance for longer to ensure that inflation returns sustainably to its 2% target. Markets have been pricing in rate cuts as early as mid-2025, but Societe Generale’s findings suggest that such expectations could be premature. The bank’s economists emphasize that underlying inflation dynamics remain sticky, particularly in the services sector where labor costs are a significant factor.

Why This Matters for Investors and Consumers

For investors, the key takeaway is that the path to normalizing monetary policy in the euro area may be longer and more uneven than currently priced. Bond yields could remain elevated, and rate-sensitive sectors such as real estate and utilities may face continued headwinds. For consumers, the delayed pass-through means that the cost of living, particularly for services like insurance, dining, and personal care, may not ease as quickly as the headline inflation drop suggests. Real wage growth, which has only recently turned positive in some euro area countries, could remain under pressure.

Conclusion

Societe Generale’s warning serves as a timely reminder that the fight against inflation is not yet over in the euro area. While headline data has improved, the structural transmission of earlier price shocks is still unfolding. Policymakers and market participants alike should remain cautious about declaring victory too soon. The coming months will reveal whether these indirect effects materialize as the bank predicts, or whether the disinflationary trend proves more resilient.

FAQs

Q1: What does Societe Generale mean by ‘indirect inflation effects’?
Indirect inflation effects refer to the delayed pass-through of higher producer and input costs to consumer prices. Even when raw material and energy costs fall, businesses may take time to adjust their final selling prices, keeping inflation higher for longer in certain sectors.

Q2: How could this affect ECB interest rate decisions?
If indirect inflation effects keep underlying price pressures elevated, the ECB may delay or slow the pace of interest rate cuts. This could mean borrowing costs remain higher for businesses and households throughout 2025.

Q3: Which sectors are most exposed to these pending inflation effects?
Services sectors, including hospitality, insurance, and professional services, are most exposed because they rely heavily on labor and have more flexibility in pricing. Non-energy industrial goods may also see delayed adjustments.